ImpactsOfGSTReformsOnEfficiencyGr Preview PDF

Impacts of GST reforms on efficiency, growth and
redistribution of income in India: A Dynamic CGE

Analysis1
Keshab Bhattarai
Faculty of Business, Law and Politics
University of Hull
Hull, England, Yorkshire, HU6 7RX, UK
Goods and service tax (GST) introduced as a ‘good and simple tax’ on 1 July 2017 by the Modi
government is the boldest measure of tax reform so far in India. The major aim of this paper is
to evaluate the micro and macro impacts of the goods and services taxes (GST) using a dynamic
computable general equilibrium model of the Indian economy. This is an original contribution as
no such work is found in the literature. This paper applies a dynamic CGE model calibrated to the
micro-consistent input-output data of the Indian economy to assess impacts of GST on the
efficiency in allocation of resources among production sectors, growth of income and
employment over time, the redistribution of income among households in India. While GST
reforms will improve specialization in productions of goods and services among the major
economic sectors of India by removing distortions in the production and distribution of goods
and services, transparency it brings in the tax system will help to maintain above seven percent
continuous growth rate in output, investment and physical capital. It also promotes expansion in
human capital and the financial system. Anti-corruption measures including recent
demonetization of large denomination notes and digitization of economic transactions along
with GST reforms will add to infrastructure including construction and expansion of
communication networks, massive electrification, development of rail, road, air and shipping
networks. By creating better opportunities for education and training for the younger
generation, health services for all continuous reforms in direct and indirect taxes will bring
speedier growth of income and employment along with more balanced distribution of income.
Key words: GST, Dynamic CGE, India

JEL classification: C68, E62, D58, O11, O12
July 4, 2017
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Paper for the ASSA/AIEFS 4-7 January 2019, Atlanta, Georgia, USA. Correspondence email address:
[email protected].
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I. Introduction
India is growing very fast in the last two decades. Millions of people have been out of poverty in
this period; rate of poverty declined from about 21 percent to below 7 percent during this
period. While there are many bright spots of the speedy growth and development, there are still
major challenges in bringing growth to the many people particularly those in rural areas and in
the families of poor income groups in many urban areas. A prudent fiscal policy can create
opportunities and create more equal distribution of income. Tax reform agenda brought by the
Modi government aims to achieve, efficiency in allocation of resources for higher rates of growth
of output and employment across various sectors of the economy and to redistribute income so
that every individual in the society has access to at least to a minimal satisfactory standard of
living (Panagariya (2017)).
The major aim of this paper is to evaluate the micro and macro impacts of the goods and services
taxes (GST) using a dynamic computable general equilibrium model of the Indian economy. This
model not only captures the current structure of the entire Indian economy but also proves more
realistic dynamic evolutionary paths of the economy over many years to come. This is an original
contribution as no such work is found in the literature. It is an excellent framework to evaluate
policy alternatives in a computer generated model economy. This exercise also helps to
understand the role India plays as a major emerging economy in the world. Section 2 provides
time series data based background on the macroeconomic dynamics of the Indian economy. Data
were from the IMF. Section 3 explains components of GST. Section 4 has specification of the
dynamic CGE model. Benchmarking and calibration of the to the micro-consistent data set is
discussed in section 5. Analysis of efficiency, growth and redistribution impacts of reforms based
2
on the dynamic solutions of the DCGE model are given in section 6 followed by conclusions of the
study in the last section.
The GST was implemented on 1 July 2017. GST Bill was passed by both houses of the parliament with an
amendment of the Constitution in August 2016. Government of India (2017), Roy (2017) and Adhiya
(2017) explained how it could be implemented, YouTube channel workshops demonstrated practical
steps. Earlier discussion on GST in India started in 2006 (Bagchi and Poddar (2007)). Rao (2010) and
Jha (2013) explained how it can fit in the context of fiscal federalism in India. Cnossen (2013), Dubey and
Shukla (2016) and Lourdunathan and Xavier (2017) explain possibility of its implementation. Despite these
no systematic studies have taken place in order to assess the economywide impacts of GST on growth,
efficiency of allocation of resources and the redistribution of income. CGE models of Ojha, Pradhan and
Ghosh (2013) used a comparative static CGE model based recursive projections argued that physical and
human capital need to be complemented by growth in TFP for long run growth. In my knowledge, no
dynamic CGE model have been used to analyze dynamic issues relating to the efficiency, growth
and redistribution in India.
II. Background of the Indian Economy
Growth rate of India has remained very impressive in the last two decades (Figure 1) on average
it has been above 6.5 percent since 1990. Liberalisation of the economy and right set of policies
have been key factors for such a sustained growth (Ahluwalia (2002), Mallick (2002), Panda and
Ganesh-Kumar (2007)). Income per capita also has increased from less than 200 US dollars in 1980s to
around 2500 Dollars in 2020 (Figure 2). In terms of PPP India’s per capita income will be around 11,000
PPP Dollars (Figure 4) by then. As a result, the share of India in the global economy is gradually rising; now
India counts around 8 percent of the global GDP in PPP terms. Given that India is home of about 20 percent
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of the global population, there is no reason why this global share could not rise to 20 percent in the next
few decades. Speedy growth supported by policy reforms such as the GST can achieve this objective.
Figure 1: Growth rate of GDP in India Figure 2: Per capital GDP in India (in $)
Data source: WEO database Oct 2017, IMF.
Figure 3: Share of India in the Global GDP in PPP Figure 4: Per capita GDP in PPP in India
Data source: WEO database Oct 2017, IMF
Growth of the economy and per capita income as above were possible because of the steady
growth in the ratios of saving and investment to GDP over time (Figure 5). Development of
financial institutions and liberalization of banking system helped to mobilize savings in a massive
scale. It raised interest to savers (Figure 6) and lowered the cost of capital to the investors.
Macroeconomic stability created atmosphere for investment and capital formation. Human
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capital was also created through expansion of high quality educational institutions and research
in science, technology and engineering. Expansion in health services also has been the source of
growth in labour force, particularly the large scale skilled young generation as required by the
economy.
Figure 5: Ratio of Saving and investment to GDP Figure 6: Interest rates in India
10.0
8.0
Annual percent
6.0
4.0
Savings
2.0 Time: 6 months
12 months
0.0
2002
2003
2008
2009
2014
2015
2000
2001
2004
2005
2006
2007
2010
2011
2012
2013
Inflation was the major challenge in 1980 to 2000 but has gradually became more stable due to
balanced budget approach and privatization and liberalisation measures adopted by the
government (Figure 7). Growth rate of money supply has declined drastically since 2011 (Figure
7a). License Raj wad dismantled and exchange rates were allowed to be driven freely by the
market (Figure 8a). This helped to solve the BOP problem (Figure 8). Such reformed were
appropriate for the long-term investment and India opened the door for FDI and technical
innovations.
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Figure 7: Inflation in India Figure 8: Current account imbalance to GDP ratio
Figure 7a: Money supply: growth rate of M3 Figure 8a: Exchange rate: Rupees per US Dollar
It is natural for a developing economy like India to have a rapidly expanding public sector. While
it is difficult to raise more revenue from a narrow and still underdeveloped tax base, demand for
public funds from infrastructure, health and education and other social services abound. This
creates wide gap between revenue and spending, it reached even 10 percent of GDP in mid 1990s
(Figure 9). Such unsustainable public finance resulted in accumulation of debt (Figure 10). In
recent years more focus has been on reducing the budget deficit to around 3-4 percent of GDP
and to trim down the debt GDP ratio. Comprehensive GST reforms can mitigate such imbalances.
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Figure 9: Revenue and spending to GDP ratios in India Figure 10: Borrowing and debt to GDP ratios in India
Another major macroeconomic problem is increasing inequality with the prospects of economic
growth across various states (Figure 13) and among different categories of households (Figure
11). Despite impressive growth rates, inequality in the distribution of income is becoming much
higher in India than in its neighboring countries (Figure 12).
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Figure 11: Distribution of Income in India (WBDI), 2017
35
31.13
30
25
20
Percent
14.21
15
9.78 10.59
10 7.77
7.17
5.41 5.86
3.64 4.44
5
0
H1 H2 H3 H4 H5 H6 H7 H8 H9 H10
Households
Figure 12: Income Inequality in SAARC countries, Gini (Wider) 2014

60
49.1 49.1
50
40 38
36
Gini coefficient
32.6 33.2 34.1
30
20
10
0
Nepal SriLnka Bangladesh Bhutan Maldives India Pakistan
Data source: WBDI, Oct 2017, World Bank
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Figure 13: Inequality in the standard of living across different states in India
Source: http://mospi.nic.in/
Huge gaps exist in per capita income among states of India as seen from Figure 13. While states
like Goa and Delhi had 132 and 119 thousand rupees of per capital income it was just 14
thousands in Bihar and 18.5 thousands in the UP. Barriers to trade between provinces created by
cascading of so many taxes are to be removed after the implementation of unified CGST, SGST
and IGST.
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III. Impacts of GST on Demand and Supply Sides of the Economy
GST was implemented in India on 1 July 2017 and it was the most important policy reform in
India since Independence. It is a comprehensive reform of the indirect tax system in India where
the central government, 29 state governments and nine union territories have reached a unique
agreement and an amendment in the constitution was required so that producers of goods and
services became liable to pay sales taxes to the central and state governments simultaneously.
It has removed all structural rigidities and extra burdens on consumers because of cascading of
taxes.
GST replaces all types of indirect taxes at the central and state levels in spirit of one nation, one
tax, one market. GST unifies all indirect taxes making one rate of indirect tax applicable on any
commodity through-out the whole country. Central GST (CGST), State GST (SGST) and integrated
GST (IGST), Union territory GST (UTGST) are parts of the same GST system. Its built-in mechanism
of tax credit system is expected to minimize the tax evasion and tax avoidance problems.
While GST started in France in 1954 its implementation was gradual across countries. Around 160
countries in the world now implement GST (Vasanthagopal, 2011). Like Canada and Brazil India is
adopting a dual GST system at the central and state levels. While the Central GST will replace
existing multitude of indirect taxes such as central excise taxes, additional excise duty, service
tax, countervailing duty, special additional duty, the state GST will replace state level VAT,
entertainment taxes, luxury tax, taxes in lottery, betting and gambling and taxes on
advertisement and entry taxes. According to the Central Board of Excise and Customs of India, a
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few indirect taxes such as basic custom duty, taxes on land and buildings and mineral rights and
excise on alcoholic liquors and stamp duty are to remain even after the implementation of GST.
GST council has determined GST rates of 0%, 5%, 12%, 18% and 28% on goods and services; a
detailed schedule exists for rates applicable specific to goods and services (see the appendix for
goods in each category from the CGE Council). It also outlines procedure on how CGST, SGST or
IGST or UTGST are paid on sales of goods and services. GST will have wide ranging demand and
supply side effects. In general GST will be beneficial to households, business firms and the central
governments simultaneously. According to the government of India (2017) households benefit
from i) Simpler tax system (ii) Reduction in prices of goods and services due to elimination of
cascading (iii) Uniform prices throughout the country (iv) Transparency in taxation system (v)
Increase in employment opportunities. Similarly trade and industry may benefit by a (i)
Reduction in multiplicity of taxes (ii) Mitigation of cascading/double taxation (iii) More efficient
neutralization of taxes especially for exports (iv) Development of common national market (v)
Simpler tax regime-fewer rates and exemptions; and the central and state governments benefit
from the GST from 1) A unified common national market to boost Foreign Investment and “Make
in India” campaign (ii) Boost to export/manufacturing activity, generation of more employment,
leading to reduced poverty and increased GDP growth (iii) Improving the overall investment
climate in the country which will benefit the development of states (iv) Uniform SGST and IGST
rates to reduce the incentive for tax evasion (v) Reduction in compliance costs as no requirement
of multiple record keepingi.
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In a nutshell, the overall tax rates of India now are as shown in Table 1. Direct tax on income
varies by categories of income. There is no income tax up to Rs 250,000 of income. Then a 10%
tax applies to income between Rs 250, 000-500,000; 20 percent tax to Rs 500, 000-1,000,000
and 30% income tax rate for income above Rs 1,000,000. Thus the direct tax system is
progressive. The GST can also be progressive tax with five different rates 0%, 5%, 12%, 18% and
28% applicable according to social optimality level for commodities being sold in the market.
While items such as Jute, fresh meat, fish chicken, eggs, milk, butter milk, curd, natural honey,
fresh fruits and vegetables, flour, besan, bread have zero rate GST, a 28 percent rate GST is
applicable in items such as Bidis, chewing gum, molasses, chocolate not containing cocoa, waffles
and wafers coated with choclate, pan masala, aerated water, paint, deodorants, shaving creams,
after shave, hair shampoo, dye, sunscreen, wallpaper, ceramic tiles, water heater, dishwasher,
weighing machine, washing machine, ATM, vending machines, vacuum cleaner, shavers, hair
clippers, automobiles, motorcycles, aircraft for personal use.
Table 1: Tax structure in India

Direct taxes Indirect taxes
Income tax GST 2017 Main taxes before GST
Taxable income (Rs) Tax rate plus 5% Central:
250,000 0 CGST Custom duties 0 to 35%
250,000 to 500,000 10% Central excise 0 to 35%
500,000 to 1,000,000 20% 25,000 12% Sevice taxes 0 to 15%
above 1,000,000 30% 125,000
SGST State:
18% VAT 5 to 15%
Corporation tax rate 30% IGST Stamp duties 2%
Dividend tax 17.00% (Land revnenue)
UTGST State excise 0 to 35%
Of the total revenue 56.30% 28% 43.70%
http://www.cbec.gov.in/htdocs-cbec/customs/cs-tariff2015-16/cst2015-16-idx
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For our counter factual scenarios we take 12 percent GST on average to be applicable to all goods
and services along with 5 percent of income tax across all households. When the existing taxes
are replaced in this way they have very positive impacts in the economy.
IV. Specification of the dynamic CGE model of India
Indirect taxes impact on efficiency, growth and redistribution by influencing both demand
and supply sides of the economy. Neither the traditional econometric models nor the
dynamic stochastic general equilibrium (DSGE) models are appropriate tools for analyzing
growth, efficiency and redistribution impacts of taxes in an economy. While the main purpose
of macro-econometric models is forecasting based on time series data, the DSGE models are
concerned in analyzing business cycles imposing nominal and real rigidities in the model.
Dynamic CGE models are truly micro-founded macroeconomic models suitable for analysis of
growth, efficiency and redistributions as the outcome of dynamic optimization processes of
households, firms and the government. Current model is based on Bhattarai (2017a 2017b)
and Haughton, Bachman, Bhattarai and Tuerck (2017) and is better than comparative static
recursive analysis of Ojha, Pradhan and Ghosh (2013) to analyze dynamic issues of the Indian
economy. We also note general discussions on tax and inequality from Bargain and Moreau
(2007) or Mirrlees, Adam, Besley, Blundell, Bond, Chote, Gammie, Johnson, Myles and
Poterba (2010) in order to improve the understanding of the incidence and burden of taxes
in the model economy.
General Equilibrium Impact of Taxes
Full impact of changes in taxes occurs through several rounds. First round effects start with
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the incidence of tax with a reduction (increase) in the household income. It can happen as taxes
affect profit of firms. These have impacts on demand for products by households and foreigners
and supply of goods and services by firms. Similarly it affects government spending and
investment spending. Second round effects occur when the burden of taxes start shifting gradually.
It manifests itself as an increase or decrease in prices of commodities, collection of revenues. Final
impacts are settled when all burdens shift through-out the economy. The detailed specification of
this model that follows has consists of households that maximize the lifetime utility subject to
budget constraints, firms maximize profit subject to technology constraints. Exports and imports
occur. Revenue and spending may differ in the short run but have to be balanced over the model
horizon.
Model contains i = 1..38 states each with h = 1....10 households. Each household in each state
receives utility from consumption of goods and leisure. Its objective is to maximise lifetime utility
against their life time budget constraints. They receive income supplying labour and capital
services to firms which pay them according to the marginal productivity. Lower income
households receive transfers from the government which collects revenue by taxing high income
households.
( )

Max U 0i ,h = 
t =0
i ,t
U ti ,h Cti ,h , lti ,h (1)
Subject to
   
 
 Ri−,t1 Pi,t (1 + t i,vc + t s,vc )Cti,h + wi,t (1 − ti,l )lth =  (1 − tl )wi,t Lit,h + (1 − ti,k )ri,t Kti,h + TRti,h + TRSti,h (2)
t =0 t =0
i ,h i ,h i ,h
where Ct , lt and Lt are respectively composite consumption, leisure and labour supplies of
t −1
1
household h in period t in country i, Ri ,t = 1+ r
s =0
is a discount factor; ri ,t represents the real
i ,s
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interest rate on assets at time s; t i ,vc is CGST on consumption, t s ,vc is SGST, t i ,l is labour income taxes,
and K ti ,h is the composite consumption, which is composed of sectoral consumption goods, Pi ,t is the
n i , g
price of composite consumption (which is based on goods’ prices), i.e. Pi ,t =    i , g pi ,, g ,t , and
i =1
n  ih
Cti ,h =  Ci ,, g ,t and the model has eleven goods, g = 1...33 .
i =1
Industries of each state in the Indian economy are represented by firms that combine both capital and
labour input in production and supply goods and services to the market.
 y −1  y −1 1
−  vj PY jv,, g .t −  jd  aid, j Pi , g ,t
y y  y −1
 y
j , g ,t = [((1 −  ) PDi ,, g ,t +  PE i , g ,t )]
e
i,g
e
i,g
(3)
i
where:  yj , g ,t is the unit profit of activity in sector j; PE j , g ,t is the export price of good j PD j , g ,t is the
domestic price of good j; PY jv, g ,t is the price of value added per unit of output in activity j;  y is a
transformation elasticity parameter ; Pi , g ,t is the price of final goods used as intermediate goods;  ej, g
is the share parameter for exports in total production;  vj , g is the share of costs paid to labour and
capital;  jd, g is the cost share of domestic intermediate inputs; aid, j are input-output coefficients for
domestic supply of intermediate goods.
Trade arrangements
Economies are open for interstate and national trade. Exports and imports are guided by the ratio of
domestic to foreign prices and balanced over years. Trade takes place between these 38 provinces and
the ROW and given by the standard Armington functions.
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m
 d m −1  m −1  −1
 m
Ai , g ,t =   i , g Di , g ,t +  i , g M i , g ,mt 
 m m
(4)
 
 
where Ai , g ,t is the Armington CES aggregate of domestic supplies Di , g ,t and import supplies M i , g ,t for
each sector,  i,dg is the share of domestically produced goods,  i,mg is the share of good i imports,  is
m
the elasticity of substitution in the aggregate supply function, and  is the shift parameter of the
aggregate supply function.
The value of exports balances to the value of imports over the model horizon but it is possible to
have imbalances on trade in the short run:
 PE
g
i , g ,t Ei ,g ,t =  PM i ,g ,t M i ,g ,t
g
(5)
Households pay taxes to their governments and governments return part revenue as transfers to the
poor households. They use rest of it to provide public services, education, health, security, law and
order. Public goods by the central and state governments are:
N N
Gi ,t =  gi , g ,t ; GSi ,t =  gsi , g ,t (6)
i =1 i =1
Central and state revenues from direct and indirect taxes as:
H H H
RVi ,t =  t wh wi ,t LS ti ,h +  t ki rt K i ,, g ,t +  t ih,t pi ,t Cih, g ,t (7)
h =1 h =1 h =1
H H H
RVS i ,t =  t wh wi ,t LS ti ,h +  tki rt K i ,, g ,t +  t sh,t pi ,t Cih, g ,t (7s)
h=1 h=1 h=1
Revenue of the central and state governments are balanced over the model horizon:
 
+  Rti ,h + TRti =  (RVi ,t )
H
G
t =1
i ,t
h =1 t
(8)
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 
+  RSti ,h =  (RVS i ,t ) + TRti
H
 GS
t =1
i ,t
h=1 t
(8s)
Optimal level of public sector balances benefits and costs from the public sector activities at both central
and state levels.
Drivers of the Dynamic in the Economy
Dynamics of the economy are driven by the accumulation of capital and fluctuations in labour supply
because of fluctuations in the supply of labour. Capital stock evolves naturally with its initial and boundary
conditions:
K i , g ,t = (1 −  i , g )K i , g ,t −1 + I i ,, g ,t ; K i , g ,t = K i , g ,0 K i , g ,T = (g i , g +  i , g )K i , g ,T −1 (9)
Similarly the labour supply equations for each household with some transition probability between
employment and unemployment
LS ti ,h + Lit,h = Lti ,h ; Lti ,h = L0 e ni ,t (10)
In aggregate the link between employment, unemployment and the total labour force of the economy
H
takes the following form: Ei ,t + UN i ,t = L
h =1
i ,h
t
where E i ,t denotes the number of total employed, UNi ,t number of unemployed out of total labour force
L
h =1
i ,h
t . Both of these return to the steady state path in the long run.
The major feature of an inter-temporal competitive general equilibrium model is that demand
equals supply in equilibrium in all periods in labour, capital, and goods markets. Trade and
government budget is balanced over time. Equilibrium is guaranteed by the relative prices that
guarantee that demand equals supply in each market. These prices in turn are determined in terms
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of behavioral parameters such as shares of spending, costs and the elasticities of substitution in
preferences (inter and intra temporal), technology (nested production function) trade (differentiated
product assumption) accumulation as given in Table 2. Other parameters that determine relative prices
include depreciation and discount rates, fiscal policy parameters such as tax rates on capital
income, labour income and final demand as well as endowments initial and terminal capital and
labour (see Appendix A).
A competitive dynamic general equilibrium is given by the set prices of composite
commodities, Pi ,t ; prices of domestic goods sold in domestic markets, PDi ,t ; prices of exported
k
commodities, PX i ,t ; prices of capital goods , Pj ,t ; prices of terminal capital , PTK j ,t ; wage rates for
each categories of labor, wh ,t ; prices of government services, PGt ; prices of provisions for tourism,
PTt ; prices of transfer, PRt ; prices of consumption, PU t ; price of aggregate welfare, PW ; price of t
foreign exchange, PFX t ; present value of foreign exchange, PVPFX t ; rental rate of capital for each
sector, r1k : R+ →R, and sequence of gross output, Yi ,t ; total supply of commodities, Ai ,t ; sectoral
capital stock, Ki , t ; sectoral investment, I i ,t ; exports, X i ,t ; government services, GOVt ; level of
household utility from consumption, U t ; and total welfare, W such that given these prices and
commodities such that
 households solve intertemporal utility maximization problems;
 investors solve intertemporal profit maximization problem;
 markets for goods and services, labor, capital clear;
 government constraint is satisfied;
 and balance of payments condition is fulfilled.
Theoretically existence, uniqueness and stability of general equilibrium is guaranteed by second
differentiability of the non-linear demand and supply functions emerging from the constrained
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dynamic optimization (Debreau (1959)). Practically this model is solved using mixed
complimentary algorithm in Path solve in GAMS/MPSGE (Rutherford (1995), and Dixon and
Parmenter (1996)).
Benchmarking Procedure
Dynamics of this model are driven by growth of capital and labour. Labour growth rates
are assumed exogenous. Share parameters in consumption and production are calibrated using
the benchmark quantities. Inter and intra temporal elasticities of substitution in consumption
and among skill categories labour and between labour and capital in production. Calibration of
capital accumulation process is crucial in solving the model.
There are essentially five steps involved in calibration of this dynamic model. The first step relates
to forming a relation between the price of investment good at period t in country i, Pi ,t and the
price of capital in period t+1, Pi ,kt +1 . It also needs specifying a link between prices of capital stock
at periods t and t+1, Pi ,kt and Pi ,kt +1 , with due account of the rental on capital and the depreciation
rate. For instance, one unit of investment made using one unit of output in period t produces one
unit of capital stock in period t+1. This implies, Pi ,t = Pi ,kt +1 , where Pi ,t is the price of one output
in period t and Pi ,kt +1 is the t period price of one unit of capital in period t+1.
Capital depreciates at the rate of  i . One unit of capital at the beginning of period t
earns a rental Rit,t and delivers (1-  i ) units of capital at the end of period t (or at the start of
the t+1 period), (1 −  i )Pi ,kt +1 . Here Rit,t is also measured in term of Pi ,Kt+1 or Pi ,t .We therefore
must have:
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Pi ,kt = Rit,t + (1 −  i ) Pi ,kt +1 (11)
In a perfect foresight world price of capital in period t really reflects the sum of discounted
rental over time.
The second step of calibration involves setting up a link of the rental rate with the
benchmark interest rate and the depreciation. The rental covers depreciation and interest
payment for each unit of investment. When rental is paid at the end of the period
Rit,t = (ri +  i )Pi ,t = (ri +  i )Pi ,kt +1 (12)
where r is the benchmark real rate of interest.
Thirdly step of calibration involves forming relation between the future and the current price of
capital. Use equation (6) and (7) together to get
Pi ,kt +1 1
=  1− i (13)
P k
i ,t 1 + ri
This means that the ratio of prices of the capital at period t and t+1 equals to the market
discount factor in the model, which is (1 −  ) .
The fourth step of calibration involves setting up equilibrium relation between capital earning
(value added from capital) and the cost of capital. We compute values for sectoral capital stocks
from sectoral capital earnings in the base year. If capital income in country i sector g in the base
year is Vi , g , we can write Vi , g = Ri , g K i , g . Thus investment per sector is tied to earnings per
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sector. Since the return to capital must be sufficient to cover interest and depreciation, we can
also write
Vi , g
Vi , g = (ri +  i ) Pi ,kt +1 K i , g , or K i,g = Since Pi ,t = Pi ,kt +1 = 1 (14)
(ri +  i )
The fifth step of calibration involves setting up relation between the investment and capital
earning on the balanced growth path. Investment should be enough to provide for growth and
depreciation, I i , g = ( g i +  i ) K i , g , which together with (9) implies
(gi +  i )
I i,g = Vi , g (15)
(ri +  i )
The balance between investment and earnings from capital is restored here by adjustment in
the growth rate g i that responds to changes in the marginal productivity of capital associated
to change in investment. Readjustment of capital stock and investment continues until this
growth rate and the benchmark interest rates become equal.
If the growth rate in sector g is larger than the benchmark interest rate then more
investment will be drawn to that sector leading to an increase in the capital stock in that sector.
By the process of diminishing return to capital more investment eventually will lower growth rate
of that sector eliminating the excess returns that attracted investment in the beginning. In the
benchmark equilibrium, all reference quantities grow at the rate of labour force growth, g, and
reference prices are discounted on the basis of the benchmark rate of return as given by equation
(8) above.
21
V. Input-output table of India for benchmarking the steady state
This dynamic CGE model is calibrated to the 33 sector input output table of India constructed
from the OECD’s input-output database (see IO table in the appendix). As shown in Figure 14
construction, agriculture, wholesale and transport sectors are the largest ones. Food, base
material, coke, chemical financial intermediation, real estate and public administration are
middle size sectors. Health, education, paper, wood, computing are still very small sectors. Sector
wise analysis like this is very important in order to figure out extensive backward and forward
linkages in the economy. Then model is augmented to include ten categories of households in
order to study the patterns of income distribution in the benchmark economy and to assess
impacts on this from various policy reform scenarios. Main elements of this dataset and
parameters are explained in this section.
Construction is the largest sector in India in recent years (Figure 14). Infrastructure projects such
as roads, railways, ships, communications, emerging large smart cities and upgrade in houses,
schools, hospitals or public and community buildings explain massive size of this sector. The
second largest sector is the agriculture sector that provides employment to millions of farmers,
as 60-70 % of population in India is still linked directly or indirectly to the agriculture sector.
22
Figure 14: Sectoral Composition of Gross Output in India, $Billion
comsrv 57,526
health 49,014
educ 77,958
padmin 125,511
randd 43,258
cmpurl 81,079
rntmch 1,971
rlest 120,005
finint 137,004
posttelc 31,180
trsnprt 267,476
hotel 93,032
wholsrt 331,532
contr 417,184
utility 72,396
manrc 62,630
othtrns 29,231
motvh 84,897
electrm 55,062
compu 36,378
machin 64,547
fabric 39,257
basmet 183,367
othnmet 46,096
rubber 45,446
chem 141,027
coke 194,735
paper 23,679
wood 3,830
textil 105,378
food 169,219
Min 54,325
Agri 398,438
0 50000 100000 150000 200000 250000 300000 350000 400000 450000

Source: 2011 Input-Output Table of India, OECD 2016. https://stats.oecd.org/index.aspx?DatasetCode=IOTS
Figure 15: Structure of production, 2017 (MOSPI) Figure 12: Structure of consumption 2017(MOSPI)
Source: http://mospi.nic.in/
The data in the input output table is used to calibrate the key parameters of the model. Some
key elasticity parameters as listed in Table 2 are based on the literature. The intertemporal
elasticity of substitution (  Lu ) measures the responsiveness of the composition of a household’s
current and future demand for the composite consumption good to relative changes in the rate
23
of interest, and is a crucial determinant of household savings (see Bhattarai et al. 2017, Haughton
et al. (2017) for detailed discussion on elasticities). The intratemporal elasticity of substitution
between consumption and leisure (  u ) determines how consumers’ labor supply responds to
changes in real wages. Further discussion on how to derive numerical values of substitution
elasticities from labor supply elasticities is provided in earlier studies on tax incidence analysis
(Bhattarai and Whalley 1999). The intratemporal elasticity of substitution among consumption
goods (  C ) captures the degree of substitutability among goods and services in private final
consumption. A higher value implies more variation in consumption choices when the relative
prices of goods and services change.
The Armington elasticity of transformation (  e ) determines the sale of domestically-produced
goods between the home and foreign markets in response to relative prices between these two
markets. The Armington substitution elasticity (  m ) determines how the domestic and import
prices affect the composition of demand for home and foreign goods. Higher values of these
elasticities mean a greater impact of the foreign exchange rate in domestic markets. Early
estimates of the elasticity of substitution between capital and labor (  v ) may be found in Arrow,
Chenery, Minhas, and Solow (1961).
24
Table 2. Key Parameters of the dynamic CGE model of India
Steady state growth rate for sectors (g) 0.075
Net interest rate in non-distorted economy (r or ϱ) 0.05
Sector specific depreciation rates (δi ) 0.05
Elasticity of substitution in domestic returns and capital flows, σ k 1.4
Elasticity of substitution for composite investment, σ 1.3
2.0
Elasticity of transformation between Indian domestic supplies and exports to the
Rest of the World (ROW), σ ε (can be sector-specific)
Elasticity of substitution between India’s domestic products and imports from the
1.5
Rest of the World (ROW), σ m
Inter-temporal elasticity of substitution, σ Lu 0.99
Intra-temporal elasticity of substitution between leisure and composite goods, σ u 1.95
Elasticity of substitution in consumption goods across sectors, σ C 2.15
Elasticity of substitution between capital and labor, σ v 2.5
Reference quantity index of output, capital and labor for each sector, Qrf (1 + g )t −1
Reference index of price of output, capital and labor for each sector, Prf 1 / (1 + r )t −1
Source: based on author’s literature review.
Table 3: Share parameters for consumption wage and interest rate

hit CNSHRWAGESHR INTSHR
h1 0.1 0.002 0.002 0.002
h2 0.1 0.004 0.004 0.004
h3 0.1 0.008 0.008 0.008
h4 0.1 0.013 0.013 0.013
h5 0.1 0.018 0.018 0.018
h6 0.1 0.027 0.027 0.027
h7 0.1 0.038 0.038 0.038
h8 0.1 0.057 0.057 0.057
h9 0.1 0.095 0.095 0.095
h10 0.1 0.738 0.738 0.738
Source: computed from the Input-Output Table of India, OECD 2016.
25
Table 4: Baseyear factor endowments, production taxes and depreciation
capital labour kstock ktax labtax deprec
Agri 22913 293516 229132 -0.517 -0.014 0.05
Min 11807 30838 118069 0.064 0.008 0.05
food 2600 18001 26004 0.197 0.010 0.05
textil 1922 18227 19224 0.286 0.010 0.05
wood 79 589 791 0.322 0.014 0.05
paper 639 4557 6393 1.299 0.061 0.05
coke 2397 24490 23971 2.685 0.088 0.05
chem 4083 32538 40827 1.215 0.051 0.05
rubber 905 8429 9047 2.049 0.073 0.05
othmet 3564 13736 35641 0.519 0.045 0.05
basmet 4041 33223 40412 1.701 0.069 0.05
fabric 1089 8770 10889 1.335 0.055 0.05
machin 1850 14685 18498 1.979 0.083 0.05
compu 509 6722 5086 4.625 0.117 0.05
electrm 1045 9160 10450 3.444 0.131 0.05
motvh 1343 13836 13426 3.351 0.108 0.05
othtrns 791 6072 7914 1.433 0.062 0.05
manrc 403 4808 4035 1.296 0.036 0.05
utility 4037 31928 40368 -0.694 -0.029 0.05
contr 40379 106149 403791 0.258 0.033 0.05
wholsrt 57143 231166 571430 0.024 0.002 0.05
hotel 2329 23078 23287 0.248 0.008 0.05
trsnprt 34532 83363 345318 0.376 0.052 0.05
posttelc 3709 14361 37088 -0.015 -0.001 0.05
finint 29824 75705 298244 0.024 0.003 0.05
rlest 39545 73243 395453 0.003 0.001 0.05
rntmch 471 1116 4706 0.007 0.001 0.05
cmpurl 36390 23331 363902 0.011 0.006 0.05
randd 3022 21463 30223 0.170 0.008 0.05
padmin 16992 97005 169924 0.050
educ 4736 65060 47356 0.029 0.001 0.05
health 3817 25834 38166 0.267 0.013 0.05
comsrv 4256 38449 42561 0.130 0.005 0.05
Source: computed from the Input-Output Table of India, OECD 2016.
Given the dynamic CGE model and parameter sets as explained in this section, this model is used
to compute the benchmark reference path of India in multi-sectoral and multi-household
settings. This provides the evolution of Indian economy for next 25 years. The next step we take
is to compute scenarios of tax policy reforms. We consider the following sets of tax policy
reforms. GST replaces all excise and production taxes, a 12 percent GST is applied to all sectors
of the economy and households ultimately pay these taxes. All households are subject to pay 5
percent household income tax. These counterfactual structures are close to the Modi
government initiative for minimum government and maximum governance. Results of the model
26
based on solutions of the model for the benchmark and counter factual scenarios are analyzed
in greater details in the next section.
VI. Analysis of Model results
The dynamic CGE model, with 25,839 variables was solved to assess macroeconomic, sectoral
and household level impacts of GST reforms. Benchmark reproduced the steady state scenario
of the Indian economy from 2017 to 2042 leaving the economy grow at the steady state
afterwards. Key parameters of the model were given in the last section and some sensitivity
analyses to those key parameters were conducted to determine the robustness of these results.
This section compares the GST reform scenario to the benchmark economy.
Impacts of GST reforms are very positive for growth, capital formation, investment, consumption
and employment in the Indian economy. Real GDP will be 5.4 to 7.5 percent higher relative to
the benchmark economy. This is possible as this reform assures investors and the aggregate
investment rises by up to 9.5 after the GST reform relative to the benchmark. Smooth flow of
goods and services also reduces the rate of depreciation of capital, it raises inflows of FDI, which
combined with additional net investment raises the stock of capital up to 35 percent towards the
end of model horizon.
Table 1. Macroeconomic effects of GST reforms (relative to benchmark, % change), 2017-2042.

Year 2017 2018 2019 2020 2021 2027 2032 2037 2042
Period 1 2 3 4 5 10 15 20 25
Real GDP 5.4 5.8 6.0 6.2 6.4 7.0 7.2 7.4 7.5
Investment 9.5 8.8 8.5 8.5 8.4 8.4 8.5 8.6 8.9
Capital stock 23.8 25.3 26.4 27.4 28.3 32.0 33.6 34.5 35.2
Employment 1.1 1.1 1.1 1.0 1.0 0.8 0.8 0.8 0.8
Consumption 4.1 4.8 5.2 5.4 5.6 6.4 6.7 6.8 6.9
Source: Dynamic CGE model of India of this paper
27
Higher growth rate allows more consumption which is higher than 6.3 percent relative to the
benchmark.
In general the GST thus raises capital intensity of the Indian economy. Impact on employment
is positive but GST reforms raises employment only up to 1 percent above the benchmark. This
is partly due to substitution of labour by capital. Creating more employment requires expansion
of labour intensive service sectors along with investment in human capital.
28
Table 2. Summary of Relative Effects of the tax reforms on welfare Groups
Year 2017 2022 2027 2032 2037 2042
Period 1 5 10 15 20 25
% change in wellbeing (“utility”)
Decile1 5.40 6.50 6.95 7.21 7.36 7.48
Decile2 -45.89 -45.62 -45.56 -45.52 -45.50 -45.48
Decile3 5.70 6.73 7.12 7.32 7.41 7.44
Decile4 6.35 7.38 7.77 7.97 8.06 8.09
Decile5 6.48 7.51 7.90 8.11 8.20 8.23
Decile6 4.18 5.19 5.57 5.77 5.87 5.89
Decile7 5.29 6.31 6.69 6.89 6.98 7.01
Decile8 5.04 6.06 6.45 6.65 6.74 6.77
Decile9 5.62 6.65 7.03 7.23 7.33 7.36
Decile10 6.96 7.99 8.38 8.58 8.68 8.71
% change in labor supply

Decile1 5.26 6.28 6.66 6.86 6.96 6.98
Decile2 6.02 7.05 7.43 7.63 7.73 7.76
Decile3 1.28 1.13 1.01 0.96 0.94 0.95
Decile4 0.80 0.65 0.53 0.48 0.46 0.47
Decile5 0.69 0.55 0.43 0.37 0.36 0.37
Decile6 2.42 2.27 2.15 2.09 2.07 2.08
Decile7 1.59 1.45 1.33 1.27 1.25 1.26
Decile8 1.77 1.63 1.51 1.45 1.43 1.44
Decile9 1.34 1.19 1.07 1.02 1.00 1.01
Decile10 0.34 0.20 0.08 0.02 0.00 0.01
% change in net consumption
Decile1 0.04 -0.53 -0.78 -0.91 -0.96 -0.97

Decile2 0.04 -0.53 -0.78 -0.91 -0.96 -0.97
Decile3 3.49 5.04 5.57 5.85 5.98 6.04
Decile4 4.12 5.68 6.21 6.49 6.63 6.68
Decile5 4.25 5.81 6.34 6.62 6.76 6.82
Decile6 2.00 3.53 4.05 4.32 4.46 4.52
Decile7 3.08 4.62 5.15 5.43 5.56 5.62
Decile8 2.85 4.38 4.91 5.18 5.32 5.38
Decile9 3.41 4.96 5.49 5.76 5.90 5.96
Decile10 4.72 6.28 6.82 7.10 7.24 7.29
The distribution income also becomes more equal after the GST reforms. The economic
wellbeing of households and their consumption increases up to by 8 percent above the
benchmark as shown in the upper section of Table 2. They also increase labour supply to take
up jobs created additionally.
29
Table 3. Percent Change in Real Output, Relative to Benchmark, by Sector
Year 2017 2022 2027 2032 2037 2042
Period 1 5 10 15 20 25
Industry
Agriculture, hunting, forestry and fishing -0.6 -0.2 0.1 0.2 0.3 0.3
Mining and quarrying -1.2 -0.9 -0.6 -0.3 -0.2 -0.1
Food products, beverages and tobacco 5.5 6.4 6.8 7.0 7.1 7.2
Textiles, textile products, leather and footwear 8.9 10.1 10.5 10.8 10.9 11.0
Wood and products of wood and cork -3.5 -3.2 -2.9 -2.8 -2.7 -2.7
Pulp, paper, paper products, printing and publishing 13.5 14.9 15.3 15.6 15.7 15.9
Coke, refined petroleum products and nuclear fuel 8.6 9.8 10.2 10.4 10.6 10.7
Chemicals and chemical products 9.9 10.9 11.3 11.5 11.6 11.7
Rubber and plastics products 4.8 6.0 6.3 6.5 6.6 6.6
Other non-metallic mineral products -14.7 -16.4 -16.4 -16.3 -16.3 -16.2
Basic metals -10.2 -10.4 -10.3 -10.3 -10.2 -10.2
Fabricated metal products -8.7 -8.7 -8.6 -8.5 -8.4 -8.4
Machinery and equipment, nec -6.1 -5.3 -5.2 -5.1 -5.1 -5.0
Computer, Electronic and optical equipment 0.8 1.9 2.1 2.2 2.3 2.4
Electrical machinery and apparatus, nec -8.5 -7.8 -7.7 -7.6 -7.6 -7.5
Motor vehicles, trailers and semi-trailers -4.9 -3.9 -3.8 -3.7 -3.6 -3.6
Other transport equipment -3.3 -2.5 -2.3 -2.2 -2.1 -2.0
Manufacturing nec; recycling 0.0 1.0 1.3 1.5 1.6 1.7
Electricity, gas and water supply -0.9 -0.4 -0.1 0.0 0.2 0.3
Construction -23.3 -25.0 -24.9 -24.9 -24.9 -24.8
Wholesale and retail trade; repairs 0.4 0.9 1.2 1.4 1.5 1.7
Hotels and restaurants 8.7 10.2 10.7 10.9 11.1 11.2
Transport and storage 13.6 16.4 17.0 17.3 17.5 17.7
Post and telecommunications 6.7 8.1 8.5 8.8 8.9 9.1
Financial intermediation 2.6 3.7 4.1 4.4 4.6 4.7
Real estate activities 5.4 10.1 11.1 11.7 12.1 12.3
Renting of machinery and equipment 2.4 4.4 5.0 5.3 5.5 5.7
Computer and related activities -2.0 -2.5 -1.6 -1.0 -0.6 -0.2
R and D and other business activities -1.8 -1.4 -1.1 -1.0 -0.8 -0.7
Public administration and defence; compulsory social security
7.1 8.7 9.1 9.4 9.5 9.6
Education 8.4 9.2 9.5 9.7 9.7 9.8
Health and social work 18.0 20.5 21.1 21.4 21.5 21.6
Other community, social and personal services 8.5 9.7 10.1 10.3 10.4 10.5
Increase in GDP is possible as output of the most of 33 production sectors increase after the
implementation of GST as shows in Table 3. Food and textile, paper, printing and publishing,
education and health, real estate, transport and storage sectors experience up to 21 percent
expansion above the benchmark economy after the GST reforms. Resources move from less
productive to more productive sectors as output of construction, non-metalic minerals and wood
products decline after the GST.
30
Table 4. Percent Change in Capital Stock, Relative to Benchmark, by Sector
Year 2017 2022 2027 2032 2037 2042
Period 1 5 10 15 20 25
Industry
Agriculture, hunting, forestry and fishing 23.8 28.6 31.9 33.8 34.9 35.5
Mining and quarrying 23.8 26.9 29.6 31.1 32.0 32.6
Wood and products of wood and cork 23.8 24.7 27.6 29.3 30.2 30.8
Other non-metallic mineral products 23.8 8.1 10.2 11.3 12.0 12.5
Basic metals 23.8 16.6 19.0 20.3 21.1 21.6
Fabricated metal products 23.8 19.5 22.0 23.4 24.2 24.8
Machinery and equipment, nec 23.8 24.1 26.6 28.0 28.8 29.3
Electrical machinery and apparatus, nec 23.8 21.1 23.4 24.7 25.4 25.9
Motor vehicles, trailers and semi-trailers 23.8 25.3 27.8 29.2 30.0 30.5
Other transport equipment 23.8 28.8 31.6 33.2 34.1 34.7
Electricity, gas and water supply 23.8 28.2 31.7 33.6 34.7 35.4
Construction 23.8 -3.7 -2.1 -1.1 -0.6 -0.2
Wholesale and retail trade; repairs 23.8 29.1 32.0 33.7 34.7 35.3
Computer and related activities 23.8 23.7 26.0 27.3 28.2 28.8
R and D and other business activities 23.8 28.0 31.1 32.9 33.9 34.6
23.8 39.8 43.3 45.2 46.3 47.0
Education 23.8 40.9 44.5 46.5 47.6 48.3
In general, by liberalizing the economy, the GST reforms make a very positive atmosphere for
investment (Table 7) and capital accumulation (Table 4). Capital stock expands up to 60 percent
above the benchmark economy because of expansion in investment and more efficiency in the
use of capital that reduces the cost of capital. Rapid expansion in production creates this supply
side response, GST reform plays a vital role in this direction.
31
Table 5. Percent Change in Relative Prices, Relative to Benchmark, by Sector
Year 2017 2022 2027 2032 2037 2042
Period 1 5 10 15 20 25
Industry
Agriculture, hunting, forestry and fishing -0.60 -1.33 -1.64 -1.80 -1.88 -1.90
Mining and quarrying -9.16 -10.13 -10.59 -10.84 -10.96 -11.01
Food products, beverages and tobacco -3.68 -4.60 -4.97 -5.17 -5.26 -5.29
Textiles, textile products, leather and footwear -5.50 -6.53 -6.93 -7.13 -7.24 -7.28
Wood and products of wood and cork -7.33 -8.25 -8.64 -8.84 -8.93 -8.97
Pulp, paper, paper products, printing and publishing -11.73 -12.80 -13.21 -13.43 -13.53 -13.57
Coke, refined petroleum products and nuclear fuel -11.49 -12.49 -12.91 -13.14 -13.25 -13.29
Chemicals and chemical products -11.33 -12.39 -12.80 -13.02 -13.12 -13.16
Rubber and plastics products -13.25 -14.25 -14.65 -14.86 -14.96 -15.00
Basic metals -13.42 -14.32 -14.75 -14.96 -15.07 -15.12
Fabricated metal products -14.45 -15.29 -15.71 -15.93 -16.03 -16.08
Machinery and equipment, nec -15.02 -15.89 -16.32 -16.55 -16.66 -16.70
Computer, Electronic and optical equipment -13.83 -14.87 -15.30 -15.53 -15.64 -15.69
Electrical machinery and apparatus, nec -17.76 -18.63 -19.05 -19.27 -19.38 -19.43
Motor vehicles, trailers and semi-trailers -17.16 -18.02 -18.43 -18.65 -18.76 -18.80
Other transport equipment -14.82 -15.74 -16.17 -16.39 -16.50 -16.55
Manufacturing nec; recycling -9.52 -10.63 -11.08 -11.31 -11.43 -11.48
Electricity, gas and water supply -1.17 -2.03 -2.41 -2.61 -2.71 -2.74
Construction -13.28 -12.61 -13.06 -13.29 -13.41 -13.46
Wholesale and retail trade; repairs -5.38 -6.32 -6.75 -6.97 -7.08 -7.12
Transport and storage -8.37 -10.21 -10.68 -10.93 -11.05 -11.10
Post and telecommunications -6.40 -7.61 -8.04 -8.26 -8.37 -8.41
Financial intermediation -5.89 -7.19 -7.67 -7.93 -8.05 -8.10
Real estate activities -2.74 -4.87 -5.43 -5.72 -5.87 -5.94
Computer and related activities -6.47 -7.36 -8.03 -8.38 -8.55 -8.62
R and D and other business activities -10.07 -11.01 -11.40 -11.61 -11.70 -11.74
-4.04 -5.25 -5.63 -5.83 -5.93 -5.96
Education -4.15 -5.05 -5.38 -5.54 -5.62 -5.64
Health and social work -7.41 -8.82 -9.20 -9.40 -9.50 -9.53
By eliminating the cascading effects of multiplicity of taxes and by removing the red-tape in the tax
administration, GST reduces the cost of supply of goods and services. This results in up to 20 percent
reduction in prices of commodities relative to benchmark (Table 5). Consumers are better off as they get
commodities at lower prices, producers also gain as the cost of capital decrease. Economy becomes more
competitive in the international market. Thus GST reforms is one step to realize the dream of make in
32
India initiative of the Modi government. It will not only stabilize prices and raise the standard of living in
India but also will make India more competitive in the global market.
Table 6. Percent Change in Employmet, Relative to Benchmark, by Sector

Year 2017 2022 2027 2032 2037 2042
Period 1 5 10 15 20 25
Industry
Agriculture, hunting, forestry and fishing -0.7 -0.5 -0.4 -0.3 -0.3 38.8
Mining and quarrying -1.2 -1.8 -2.1 -2.3 -2.4 48.2
Wood and products of wood and cork -3.8 -3.5 -3.6 -3.7 -3.7 34.6
Other non-metallic mineral products -17.1 -16.4 -16.8 -17.1 -17.2 0.1
Basic metals -9.8 -9.8 -10.2 -10.4 -10.5 0.4
Fabricated metal products -7.7 -7.6 -7.9 -8.0 -8.1 0.1
Machinery and equipment, nec -4.2 -4.0 -4.4 -4.6 -4.7 0.2
Electrical machinery and apparatus, nec -6.3 -6.3 -6.8 -7.1 -7.2 0.3
Motor vehicles, trailers and semi-trailers -3.4 -3.1 -3.5 -3.7 -3.9 0.3
Other transport equipment -0.2 -0.3 -0.6 -0.8 -0.8 0.3
Electricity, gas and water supply -1.1 -0.8 -0.6 -0.5 -0.4 0.3
Construction -31.0 -25.5 -26.1 -26.3 -26.5 0.2
Wholesale and retail trade; repairs 0.2 -0.2 -0.3 -0.4 -0.4 0.2
Computer and related activities -3.8 -4.3 -4.9 -5.1 -5.2 0.3
R and D and other business activities -1.0 -1.0 -1.0 -1.0 -1.0 0.2
8.5 8.2 8.2 8.2 8.2 0.4
Education 9.1 9.0 9.1 9.1 9.2 0.2
Economy creates more employment in the service sectors including the transport and storage, hotel and
restaurant, food and beverages and textiles, health and education and community services sectors after
33
the GST reforms. Some additional measure need to be taken to prevent loss of employment in
construction, non-metalic mineral products or fabricated metal products. As stated above increase in
capital intensity is the reason for job losses in these sectors. Investment in human capital can correct this.
Table 7. Percent Change in investment, Relative to Benchmark, by Sector

Year 2017 2022 2027 2032 2037 2042
Period 1 5 10 15 20 25
Industry
Agriculture, hunting, forestry and fishing -12.2 20.3 12.0 9.0 8.9 8.9
Mining and quarrying -18.8 15.6 8.9 6.4 6.4 6.4
Wood and products of wood and cork -34.8 15.3 7.8 5.1 5.0 5.0
Basic metals -90.2 6.9 0.1 -2.5 -2.5 -2.5
Fabricated metal products -71.8 10.3 2.9 0.1 0.1 0.1
Machinery and equipment, nec -43.0 16.4 7.2 3.8 3.8 3.7
Electrical machinery and apparatus, nec -62.6 13.1 4.2 1.0 1.0 1.0
Motor vehicles, trailers and semi-trailers -32.9 18.0 8.3 4.7 4.7 4.7
Other transport equipment -10.2 20.4 11.4 8.1 8.1 8.1
Electricity, gas and water supply -17.3 19.6 11.8 8.8 8.8 8.7
Construction -100.0 -100.0 -41.0 -20.0 -20.0 -20.0
Wholesale and retail trade; repairs -7.3 19.2 11.5 8.6 8.6 8.5
Hotels and restaurants #DIV/0! 174.4 23.9 20.4 20.3 20.3
Renting of machinery and equipment #DIV/0! 76.0 15.1 12.3 12.3 12.2
Computer and related activities -47.9 12.2 5.5 3.1 3.1 3.1
R and D and other business activities -21.3 19.2 11.1 8.1 8.0 8.0
43.0 30.2 21.5 18.2 18.1 18.1
Education 50.4 31.6 22.6 19.3 19.2 19.2
Other community, social and personal services #DIV/0! 121.5 19.2 15.8 15.8 15.8
34
VII. Conclusions
From analyses based on solutions of a dynamic CGE model of India, it can be said that the goods
and service tax (Tax) implemented on 1 July 2017 will enhance growth rates and promote
investment and capital accumulation in India. It will improve income, consumption and utility of
households no matter whether they belong to poor, middle or rich income groups. It will lower
the relative prices of commodities but raise the investment, capital stock and employment
among 33 production sectors of the model economy. Government will be able to follow more
balanced budget following its strategy of minimal government and maximum governance as
revenue increases to finance a reasonable growth in the public spending. This GST reform is of
fundamental importance as it will unite all 27 states, 7 union territories by integrating more than
seven indirect taxes at the central level, seven another taxes at the state level and eliminating
more than 500 special cases of indirect taxes making one tax, one nation and one market idea
possible for India.
The dynamic CGE model, with 25,839 variables was solved to assess macroeconomic, sectoral
and household level impacts of GST reforms. Benchmark reproduced the steady state scenario
of the Indian economy from 2017 to 2042 leaving the economy grow at the steady state
afterwards. Key parameters of the model were given in the last section and some sensitivity
analyses to those key parameters were conducted to determine the robustness of these results.
This section compares the GST reform scenario to the benchmark economy. The main results can
be enumerated as follows:
35
1) Impacts of GST reforms are very positive for growth, capital formation, investment,
consumption and employment in the Indian economy. Real GDP will be 5.4 to 7.5 percent
higher with GST reforms relative to the benchmark economy. This is possible as this
reform assures investors and the aggregate investment rises by up to 9.5 after the GST
reform relative to the benchmark. Smooth flow of goods and services also reduces the
rate of depreciation of capital, it raises inflows of FDI, which combined with additional net
investment raises the stock of capital up to 35 percent towards the end of model horizon.
2) Higher growth rate allows more consumption which is higher than 6.3 percent relative to
the benchmark.
3) In general the GST thus raises capital intensity of the Indian economy. Impact on
employment is positive but GST reforms raises employment only up to 1 percent above
the benchmark. This is partly due to substitution of labour by capital. Creating more
employment requires expansion of labour intensive service sectors along with investment
in human capital.
4) The distribution of income also becomes more equal after the GST reforms. The economic
wellbeing of households and their consumption increases up to by 8 percent above the
benchmark. They also increase labour supply to take up jobs created additionally.
5) Increase in GDP is possible as output of the most of 33 production sectors increase after
the implementation of GST. Food and textile, paper, printing and publishing, education
and health, real estate, transport and storage sectors experience up to 21 percent
expansion above the benchmark economy after the GST reforms. Resources move from
36
less productive to more productive sectors as output of construction, non-metalic
minerals and wood products decline after the GST.
6) In general, by liberalizing the economy, the GST reforms make a very positive atmosphere
for investment and capital accumulation. Capital stock expands up to 60 percent above
the benchmark economy because of expansion in investment and more efficiency in the
use of capital that reduces the cost of capital. Rapid expansion in production creates this
supply side response, GST reform plays a vital role in this direction.
7) By eliminating the cascading effects of multiplicity of taxes and by removing the red-tape in the
tax administration, GST reduces the cost of supply of goods and services. This results in up to 20
percent reduction in prices of commodities relative to benchmark. Consumers are better off as
they get commodities at lower prices, producers also gain as the cost of capital decrease. Economy
becomes more competitive in the international market. Thus GST reforms is one step to realize
the dream of “make in India” initiative of the Modi government. It will not only stabilize prices
and raise the standard of living in India but also will make India more competitive in the global
market.
8) Economy creates more employment in the service sectors including the transport and storage,
hotel and restaurant, food and beverages and textiles, health and education and community
services sectors after the GST reforms. Some additional measure need to be taken to prevent loss
of employment in construction, non-metalic mineral products or fabricated metal products. As
stated above increase in capital intensity is the reason for job losses in these sectors. Investment
in human capital can correct this.
37
References
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Economic Perspectives, 16:3, 67-88
3. Bagchi, Amaresh, and Satya Poddar (2007) "GST for India: Some Basic Questions." .
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approach. In Inequality and Poverty (pp. 317-344). Emerald Group Publishing Limited.
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Netherlands.
10. Cnossen, Sijbren (2013) Preparing the Way for a Modern GST in India, International Tax and Public
Finance, August 2013, v. 20, iss. 4, pp. 715-23
11. Debreu, G. (1959), Theory of value, Yale University Press.
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by Single Indirect Tax." Imperial Journal of Interdisciplinary Research 2, no. 11 (2016).
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Department of Revenue, the Ministry of Finance, Government of India.
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Trump and Clinton Tax Plans, the Atlantic Economic Journal, forthcoming.
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Richard M. Bird and Pierre-Pascal Gendron's The VAT in Developing and Transitional
Countries." Journal of Economic Literature, 47(1): 159-70.
38
18. Lourdunathan, F., and P. Xavier (2017) "A study on implementation of goods and services tax (GST)
in India: Prospectus and challenges." International Journal of Applied Research 3, no. 1 (2017): 626-
629.
19. Mallick S. K. (2002) Determinant of Long run growth in India: A Keynesian Approach, Progress in
Development Studies, 2,4, 306-324
20. Mirrlees J., and S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G.
Myles, J. Poterba.(2010) Dimensions of Tax Design: the Mirrlees review, Oxford: Oxford University
Press
21. Ojha, V.P., Pradhan, B.K. and Ghosh, J., 2013. Growth, inequality and innovation: A CGE analysis of
India. Journal of Policy Modeling, 35(6), pp.909-927.
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(August 19, 2009). Available at
SSRN: https://ssrn.com/abstract=1457628 or http://dx.doi.org/10.2139/ssrn.1457628
Panda Manoj K and A. Ganesh-Kumar (2007) Impact of Economic Growth on Achieving MDGs, Paper
for the GDP Conference, Kathmandu.
24. Panagariya A (2017) Economic Progress During the First Two Years under Prime Minister
Narendra Modi: Occassional Paper No. III , NITI Aayog.
25. Pomeranz, Dina. 2015. "No Taxation without Information: Deterrence and Self-Enforcement
in the Value Added Tax." American Economic Review, 105(8): 2539-69
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Thought 8, 2: 219.
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Overview of the Modeling Framework and Syntax , Computational Economics 14: 1--46
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Web pages:
http://www.cbec.gov.in/htdocs-cbec/customs/cs-tariff2015-16/cst2015-16-idx
https://www.youtube.com/watch?v=grz_iGHAYSI
39
Input-output Table of India (OECD 2016)
Agri Min food textil wood paper coke chem rubber othmet basmet fabric machin compu electrm motvh othtrns manrc utility contr wholsrt hotel trsnprt posttelc finint rlest rntmch cmpurl randd padmin educ health comsrv
Agri 50298.1 0.8 67595.7 10971.2 1106.2 1253.0 7.1 1236.1 1649.6 56.9 7.8 5.9 32.4 5.9 12.1 18.1 4.0 68.7 3.4 7714.0 0.9 21522.9 3388.0 0.4 1.0 1.2 0.1 0.5 34.7 471.4 85.0 260.3 34.9
Min 2.4 288.7 118.0 416.4 21.6 263.4 116900.3 2819.8 39.9 4516.3 24102.3 305.5 239.0 43.5 189.3 150.8 52.1 2951.1 7721.4 5955.7 2.4 21.3 39.3 0.5 0.8 0.7 0.1 2.9 8.5 32.7 0.2 1.4 4.3
food 2865.6 11.1 28245.9 429.4 16.9 152.1 80.6 3103.8 316.0 375.3 235.7 79.3 16.0 8.8 21.7 11.2 7.1 42.3 17.8 143.7 2.8 17409.4 98.5 1.3 60.7 0.5 0.1 3.6 6.5 1122.4 3.8 71.8 5.4
textil 1206.4 48.8 363.9 21283.6 59.9 180.2 40.6 891.8 906.9 180.2 49.4 64.8 88.4 136.5 276.3 365.8 51.0 331.8 95.1 910.9 124.1 791.7 2763.3 39.8 91.1 1.6 0.1 46.8 51.4 304.3 52.7 297.4 56.4
wood 6.6 18.0 161.9 74.2 40.0 65.6 6.8 114.7 13.0 21.3 11.4 10.6 19.7 18.3 17.1 11.6 10.3 58.4 25.7 849.5 36.8 130.8 37.4 16.1 50.3 3.2 0.0 0.8 86.3 27.1 24.6 89.0 43.3
paper 146.8 32.1 2249.0 723.4 50.8 5873.0 31.2 680.1 167.4 187.7 53.1 65.2 84.6 83.1 219.3 47.3 37.3 296.5 174.8 767.6 1980.1 625.8 2026.8 344.9 1223.7 8.6 0.4 106.0 218.3 556.1 178.3 170.4 118.7
coke 124.8 904.1 26.3 818.7 75.4 634.2 6545.6 4434.8 1226.5 2806.5 6399.1 722.5 1445.8 977.7 1263.0 1873.0 627.5 959.7 3200.9 11799.7 2310.9 528.1 35350.8 791.3 894.1 85.8 1.4 164.4 387.8 255.2 148.2 580.9 561.6
chem 11620.4 1157.0 2611.2 7847.9 236.5 1785.0 3156.1 49446.7 13703.2 1880.4 2220.8 389.1 440.3 480.3 1865.4 849.6 694.2 1839.1 602.9 5299.5 122.7 373.3 2989.6 96.1 63.8 8.2 1.1 23.8 142.2 412.4 272.1 7506.4 275.3
rubber 455.7 151.3 872.0 1486.9 89.0 391.9 110.5 2364.3 5776.6 1180.5 285.0 343.1 376.9 290.3 604.7 1335.4 372.1 991.4 48.6 555.1 165.9 62.2 5619.0 113.9 106.0 0.9 0.3 14.7 34.3 63.2 19.9 237.8 36.4
othmet 13.8 69.4 185.9 30.1 5.8 29.6 40.1 119.4 30.6 2855.7 469.5 101.2 195.7 229.2 176.8 169.9 45.7 54.7 12.7 35122.3 7.6 39.8 178.4 6.8 2.0 0.3 0.1 1.8 9.5 1.5 0.5 8.4 9.1
basmet 42.5 70.4 23.5 86.5 211.7 84.9 156.3 500.0 238.3 548.1 63884.1 14299.0 15050.4 1479.1 14040.2 14729.0 4217.5 1472.4 92.0 57568.4 238.5 15.5 309.1 15.8 32.4 0.7 0.2 6.5 19.6 11.7 1.7 14.0 16.9
fabric 35.1 221.4 64.6 122.8 37.0 59.5 13.5 82.3 102.6 110.4 4781.6 1695.3 2155.6 348.9 1843.7 3425.7 949.6 527.0 53.8 8480.1 858.8 20.5 717.9 43.3 105.7 1.8 0.2 10.7 53.9 24.4 2.6 17.9 40.8
machin 412.0 1033.5 320.3 958.5 26.5 73.0 78.1 466.4 117.0 124.2 764.6 1117.7 7138.2 701.4 1316.2 7488.7 1378.5 1017.7 583.4 1850.4 210.7 467.0 2367.1 277.7 140.0 2.1 1.1 39.4 85.7 97.1 12.8 47.1 95.2
compu 39.2 39.3 33.7 95.6 2.4 98.4 22.4 87.6 46.0 80.1 372.6 229.0 502.0 6040.9 1044.1 495.4 335.9 2444.7 105.8 828.0 43.3 321.7 373.2 5321.0 596.5 10.9 15.8 584.4 1036.2 308.0 7.0 358.8 886.7
electrm 66.2 131.6 52.9 154.8 12.9 19.6 11.4 193.0 45.1 66.8 1526.1 947.4 2138.6 2875.7 4827.1 4020.5 928.4 1142.6 1878.6 4434.3 119.7 135.7 1486.5 314.7 57.6 0.8 2.4 20.2 38.8 30.9 3.3 13.8 63.6
motvh 192.1 263.1 33.6 47.1 3.0 7.7 10.7 37.1 40.5 11.4 100.7 49.4 226.2 36.3 77.5 9948.6 851.5 787.9 391.5 517.3 78.4 39.8 5427.2 158.1 420.4 1.1 3.3 154.1 278.3 435.2 40.5 65.7 108.0
othtrns 223.8 8.0 11.8 9.3 1.6 2.6 2.7 10.5 23.3 74.6 198.1 51.0 72.2 22.4 57.1 463.4 4229.5 51.1 19.8 1054.6 7.8 4.5 2166.6 8.9 168.7 7.7 3.1 143.4 241.2 58.1 2.6 10.9 230.0
manrc 121.3 71.1 113.6 361.8 10.6 154.3 20.8 274.3 94.0 69.5 469.5 266.0 410.1 194.1 456.2 576.3 308.7 13667.6 389.0 3081.6 704.2 239.1 1708.7 106.4 151.2 2.6 0.2 195.2 186.1 51.1 61.5 88.4 1656.4
utility 3776.5 1019.3 3821.2 3388.2 34.6 615.3 1107.5 3548.5 961.8 1613.9 3912.4 281.4 616.2 1035.7 1152.2 1521.2 643.3 657.7 11923.7 4969.0 1664.0 1448.5 4387.8 1112.9 2280.9 5.3 60.4 1936.3 826.7 1184.6 68.6 126.9 355.6
contr 2393.3 875.0 1054.2 1870.0 22.2 391.5 101.3 784.3 153.2 1690.3 212.3 231.2 785.5 391.6 662.5 414.8 110.5 561.7 1443.9 44573.8 992.0 2126.3 3347.3 534.6 1679.8 4077.8 46.5 1539.7 853.4 728.8 838.8 455.8 442.1
wholsrt 12212.5 762.3 19208.9 13843.9 359.6 1898.0 22609.4 12998.5 4442.0 2845.2 11936.4 2088.9 3397.8 2432.0 3226.3 5201.4 1478.3 8868.5 2579.5 19563.7 3285.5 8479.3 13405.6 1538.4 752.7 67.0 25.9 624.2 718.0 908.1 239.8 1987.9 1278.0
hotel 428.6 116.7 1.8 13.3 0.1 0.4 2.1 2.5 0.8 0.4 2.2 0.5 1.2 0.7 0.8 1.3 0.5 5.3 360.9 133.3 2790.4 4069.3 17510.5 143.5 3366.3 275.9 15.9 834.7 2319.6 233.4 907.1 3195.9 325.7
trsnprt 6464.8 1515.2 8929.3 10033.7 328.1 1826.3 4867.2 7291.1 1989.8 3605.8 9674.0 1118.5 1950.4 2254.7 2399.4 3039.8 992.4 9700.6 3245.5 20286.9 10797.8 4041.0 8912.8 817.1 3807.0 5.2 11.1 488.0 649.7 1427.4 2324.8 1089.2 787.0
posttelc 68.6 57.2 588.7 497.6 17.4 64.0 159.6 340.3 72.9 119.2 433.8 26.7 159.8 2772.5 698.6 238.6 228.8 451.5 427.7 344.8 611.6 265.5 3006.0 423.1 3876.6 52.8 3.4 387.2 676.8 475.6 203.1 375.8 837.7
finint 4027.3 897.6 8441.5 4732.2 288.4 771.7 2487.9 4191.8 886.2 926.6 3698.1 1203.8 2456.7 1936.0 1785.3 5841.3 1541.7 4952.3 4386.1 13099.6 11753.4 2978.7 5469.3 246.7 9103.4 1109.4 84.1 2071.0 1309.0 876.2 2111.6 666.9 2722.0
rlest 2.4 1.2 3.7 4.4 0.1 0.4 2.1 2.2 0.5 0.8 3.2 1.1 4.4 1.9 1.8 2.8 0.7 5.0 1.3 550.2 4.9 0.9 25.3 13.6 1.8 688.7 0.1 7.3 1092.7 1.5 0.5 0.4 4.7
rntmch 34.7 282.6 49.4 40.2 6.6 10.5 2.4 13.2 7.9 1.0 18.5 2.4 3.2 19.8 6.8 74.8 63.6 53.9 6.1 131.5 5.0 10.3 1295.1 98.8 3.2 0.4 65.2 17.9 10.4 90.5 5.9 1.7 276.9
cmpurl 307.5 49.4 1644.6 1707.2 37.6 589.6 599.0 1127.6 290.0 220.2 323.2 1305.2 1474.2 423.6 1219.1 562.0 480.8 951.9 42.8 171.1 834.6 447.5 1274.3 189.0 669.1 7.0 1.9 7221.8 330.9 788.0 51.5 99.1 197.2
randd 155.0 344.2 913.5 1280.6 22.1 37.4 57.6 358.1 70.2 110.1 610.6 285.0 1478.8 585.7 482.2 790.9 186.2 1465.9 276.2 5820.0 1625.8 149.2 6036.9 137.1 555.0 588.6 30.1 2619.5 6216.0 522.5 143.4 67.9 1730.0
padmin 7.8 3.1 14.4 17.1 0.5 5.7 7.5 14.5 3.6 4.3 12.8 4.1 11.1 5.9 6.9 8.2 3.3 76.4 7.3 54.0 18.0 5.4 43.8 2.1 7.6 3.0 0.2 19.4 30.8 4.5 2.4 2.4 16.5
educ 2.8 126.1 5.7 7.5 0.2 1.1 1.2 3.3 0.7 0.9 3.9 2.4 8.3 3.3 3.3 4.5 1.4 9.3 1.6 29.8 8.2 1.2 99.4 185.5 3.1 2.8 0.2 746.7 30.1 3.1 155.3 61.1 8.9
health 2.2 4.4 2.7 3.2 0.2 1.0 1.6 5.0 1.4 0.7 2.2 0.7 1.6 1.2 1.3 2.3 1.2 8.1 0.9 8.3 1.9 0.9 220.6 45.0 158.4 0.3 0.9 709.0 3.4 1.8 0.3 0.8 5.6
comsrv 53.4 105.5 172.2 1138.5 2.3 34.1 26.5 251.1 222.9 41.8 161.2 165.4 149.9 173.5 103.5 36.5 22.3 248.5 46.1 89.7 16.2 82.0 200.8 37.3 100.1 35.1 3.3 61.6 101.4 4.0 8.7 30.7 855.4
Value added and final demand in the IO table of India (OECD 2016)
Agri Min food textil wood paper coke chem rubber othmet basmet fabric machin compu electrm motvh othtrns manrc utility contr wholsrt hotel trsnprt posttelc finint rlest rntmch cmpurl randd padmin educ health comsrv
capital 22913.2 11806.9 2600.4 1922.4 79.1 639.3 2397.1 4082.7 904.7 3564.1 4041.2 1088.9 1849.8 508.6 1045.0 1342.6 791.4 403.5 4036.8 40379.1 57143.0 2328.7 34531.8 3708.8 29824.4 39545.3 470.6 36390.2 3022.3 16992.4 4735.6 3816.6 4256.1
wages 293515.9 30838.1 18001.4 18227.2 588.9 4557.3 24489.5 32538.2 8429.4 13736.5 33223.3 8770.0 14685.1 6722.0 9160.0 13836.0 6071.7 4807.6 31928.4 106149.5 231166.5 23077.9 83363.5 14361.1 75705.2 73242.9 1116.2 23330.9 21462.8 97005.4 65060.2 25834.5 38448.9
prodtax -15801.1 1000.1 681.8 732.1 34.0 1107.1 8580.8 6611.2 2471.6 2468.3 9166.5 1938.9 4881.2 3136.7 4799.3 5997.8 1512.1 697.3 -3736.3 13897.3 1797.9 770.7 17297.3 -71.6 943.0 159.1 4.5 553.9 685.0 0.0 183.1 1359.7 734.7
Cons 212895.4 211.0 100093.6 49122.1 1507.8 7492.7 51602.7 21512.7 8635.8 2551.4 753.4 2086.3 5798.1 4388.1 1399.0 11003.6 3172.5 9942.3 9685.0 1534.5 114744.7 49274.1 126526.0 8415.4 43900.2 117998.9 2230.8 14649.1 4519.5 125664.8 76571.4 47684.0 29743.6
gov 512.0 250.9 32.1 1257.3 589.6 107.1 12781.0 1659.7 8150.6 1562.3 36945.9 8407.8 40685.6 21043.4 24803.0 44662.7 10647.8 7346.9 129.7 332951.4 27000.9 7.3 13388.5 23.2 30.5 5.7 38.9 16692.4 106.7 54.1 12.7 9.4 35.6
inv 13309.0 10296.5 4434.1 3212.3 63.1 924.7 4956.6 4449.7 1125.0 1725.2 14698.1 1577.0 1971.7 2099.7 1866.6 4906.2 1526.0 2261.2 612.4 4407.0 11955.4 30.6 2276.2 50.7 528.9 60.6 71.0 3103.6 499.2 21.8 8.6 16.0 122.3
export 9726.7 7256.4 17662.6 22421.8 127.7 1527.6 49776.3 29180.8 6165.7 2097.1 15335.7 5244.0 9987.4 8556.4 7461.6 9933.2 9461.9 31063.3 178.5 3167.4 52501.9 0.0 48746.6 5834.4 3345.9 0.0 46.2 26393.6 34919.3 0.0 0.0 0.0 19811.7
Import 5865.0 130909.5 8933.4 3855.8 560.4 5914.2 13850.4 36791.9 3228.8 2067.7 73853.0 5086.1 25011.4 23045.7 8276.4 6491.5 5222.7 15000.0 274.7 1272.7 62082.5 6769.6 69095.3 2114.9 19870.2 1651.0 3875.1 5404.9 32552.1 880.1 688.6 301.6 2538.0
i
For new GST rates see YouTube Channel https://www.youtube.com/watch?v=grz_iGHAYSI; http://www.cbec.gov.in/htdocs-cbec/customs/cs-tariff2015-
16/cst2015-16-idx
According to ECONOMICTIMES.COM on Jun 29, 2017
No tax(0%)
Goods
No tax will be imposed on items like Jute, fresh meat, fish chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread,
40
prasad, salt, bindi. Sindoor, stamps, judicial papers, printed books, newspapers, bangles, handloom, Bones and horn cores, bone grist, bone meal, etc.; hoof meal,
horn meal, Cereal grains hulled, Palmyra jaggery, Salt - all types, Kajal, Children's' picture, Children's' picture, drawing or colouring books, Human hair
Services , Hotels and lodges with tariff below Rs 1,000, Grandfathering service has been exempted under GST,
5%
Goods
Items such as fish fillet, Apparel below Rs 1000, packaged food items, footwear below Rs 500, cream, skimmed milk powder, branded paneer, frozen vegetables,
coffee, tea, spices, pizza bread, rusk, sabudana, kerosene, coal, medicines, stent, lifeboats, Cashew nut, Cashew nut in shell, Raisin, Ice and snow, Bio gas,
Insulin, Agarbatti, Kites, Postage or revenue stamps, stamp-post marks, first-day covers
Services
Transport services (Railways, air transport), small restaurants will be under the 5% category because their main input is petroleum, which is outside GST ambit.
12%
Goods
Apparel above Rs 1000, frozen meat products , butter, cheese, ghee, dry fruits in packaged form, animal fat, sausage, fruit juices, Bhutia, namkeen, Ayurvedic
medicines, tooth powder, agarbatti, colouring books, picture books, umbrella, sewing machine, cellphones, Ketchup & Sauces, All diagnostic kits and reagents,
Exercise books and note books, Spoons, forks, ladles, skimmers, cake servers, fish knives, tongs, , Spectacles, corrective, Playing cards, chess board, carom
board and other board games, like ludo,
Services
State-run lotteries, Non-AC hotels, business class air ticket, fertilisers, Work Contracts will fall under 12 per cent GST tax sla
18%
Goods
Most items are under this tax slab which include footwear costing more than Rs 500, Trademarks, goodwill, software, Bidi Patta, Biscuits (All catogories), flavoured
refined sugar, pasta, cornflakes, pastries and cakes, preserved vegetables, jams, sauces, soups, ice cream, instant food mixes, mineral water, tissues, envelopes,
tampons, note books, steel products, printed circuits, camera, speakers and monitors, Kajal pencil sticks, Headgear and parts thereof, Aluminium foil, Weighing
Machinery [other than electric or electronic weighing machinery], Printers [other than multifunction printers], Electrical Transformer, CCTV, Optical Fiber, Bamboo
furniture, Swimming pools and padding pools, Curry paste; mayonnaise and salad dressings; mixed condiments and mixed seasonings
Services
AC hotels that serve liquor, telecom services, IT services, branded garments and financial services will attract 18 per cent tax under GST, Room tariffs between Rs
2,500 and Rs 7,500, Restaurants inside five-star hotels
28%
Goods
Bidis, chewing gum, molasses, chocolate not containing cocoa, waffles and wafers coated with choclate, pan masala, aerated water, paint, deodorants, shaving
creams, after shave, hair shampoo, dye, sunscreen, wallpaper, ceramic tiles, water heater, dishwasher, weighing machine, washing machine, ATM, vending
machines, vacuum cleaner, shavers, hair clippers, automobiles, motorcycles, aircraft for personal use.
Services
Private-run lotteries authorised by the states, hotels with room tariffs above Rs 7,500, 5-star hotels, race club betting, cinema
Read more at:
http://economictimes.indiatimes.com/articleshow/58743715.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
41
A glimpse on the existing tax system is enough for a tentative idea of how GST has changed the indirect tax system in India. Before
the GST general sales of goods were liable to VAT and central sales tax (CST) on goods moving across the states. State level VAT
ranged from 5 to 15 percent and there were concessional rates of 5 %, 1% and 0 %. According to the KPMG report the main
categories of goods covered by these included:
1) 5 percent - IT products, intangible goods (such as patents and copyrights), capital goods, chemical fertilizers, cotton, drugs and
medicines, iron and steel, industrial inputs, sports goods, tractors
2) 1 percent - Gold, silver, precious stones (for example diamonds), articles or ornaments made of the aforementioned
3) Zero percent - Books, milk, fresh plants, flowers, vegetables and fruits, meat, fish, prawn, rice, and wheat Zero rated - Exports of goods
4) higher VAT rates of 20 percent and above, applicable to petroleum products (such as diesel, petrol, lubricants, and aviation turbine fuel),
natural and other gases used as fuel, liquor and beer.
5) As regards CST, it is charged at the rate of 2 percent with Form C or VAT rate applicable in the originating state without Form C.
6) There is another indirect tax on provision of services known as Service tax, which is ordinarily discharged by the service provider. The
standard rate of Service tax was increased vide Union Budget 2015 to 14 percent (effective from 1 June 2015). With effect fro m 15
November 2015, additional levy of 0.5 percent in the form of Swatch Bharat Cess ('SBC') has been introduced. In effect, the tax levied on
services has become 14.5 percent. SBC is not creditable. Further, with effect from 1 June 2016, additional levy of 0.5 percen t in the form
of Krishi Kalyan Cess ('KKC') has been introduced. In effect, tax levied on services has become 15 percent. KKC can be set off only against
output liability of KKC.
In terms of the Service tax law, all services other than those mentioned under the Negative List of services or specifically exempted under any notification,
would be liable to Service tax. While any services exported out of India would be zero rated, any services received in India from outside India (import) would be
liable to Service tax in the hands of the recipient of such service under reverse charge mechanism. Whether a service would qualify as export/ import would be
determined by the Provision of Service Rules, 2012.
42

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Impacts of GST reforms on efficiency, growth and

redistribution of income in India: A Dynamic CGE

Key words: GST, Dynamic CGE, India

living (Panagariya (2017)).

contribution as no such work is found in the literature. It is an excellent framework to evaluate

study in the last section.

and redistribution in India.

II. Background of the Indian Economy

Data source: WEO database Oct 2017, IMF.

Data source: WEO database Oct 2017, IMF

Data source: WEO database Oct 2017, IMF

Data source: WEO database Oct 2017, IMF

higher in India than in its neighboring countries (Figure 12).

Figure 12: Income Inequality in SAARC countries, Gini (Wider) 2014

32.6 33.2 34.1

governments simultaneously. According to the government of India (2017) households benefit

in India” campaign (ii) Boost to export/manufacturing activity, generation of more employment,

of multiple record keepingi.

clippers, automobiles, motorcycles, aircraft for personal use.

Table 1: Tax structure in India

IV. Specification of the dynamic CGE model of India

growth, efficiency and redistributions as the outcome of dynamic optimization processes of

in the model economy.

General Equilibrium Impact of Taxes

It manifests itself as an increase or decrease in prices of commodities, collection of revenues. Final

domestic supply of intermediate goods.

the ROW and given by the standard Armington functions.

aggregate supply function.

have imbalances on trade in the short run:

order. Public goods by the central and state governments are:

and state levels.

Drivers of the Dynamic in the Economy

employment and unemployment

LS ti ,h + Lit,h = Lti ,h ; Lti ,h = L0 e ni ,t (10)

labour (see Appendix A).

A competitive dynamic general equilibrium is given by the set prices of composite

capital stock, Ki , t ; sectoral investment, I i ,t ; exports, X i ,t ; government services, GOVt ; level of

commodities such that

 households solve intertemporal utility maximization problems;

 investors solve intertemporal profit maximization problem;

 markets for goods and services, labor, capital clear;

 government constraint is satisfied;

 and balance of payments condition is fulfilled.

Theoretically existence, uniqueness and stability of general equilibrium is guaranteed by second

capital accumulation process is crucial in solving the model.

rental over time.

Rit,t = (ri +  i )Pi ,t = (ri +  i )Pi ,kt +1 (12)

where r is the benchmark real rate of interest.

capital. Use equation (6) and (7) together to get

discount factor in the model, which is (1 −  ) .

depreciation, I i , g = ( g i +  i ) K i , g , which together with (9) implies

growth rate and the benchmark interest rates become equal.

parameters are explained in this section.

0 50000 100000 150000 200000 250000 300000 350000 400000 450000

elasticity of substitution (  Lu ) measures the responsiveness of the composition of a household’s

prices of goods and services change.

The Armington elasticity of transformation (  e ) determines the sale of domestically-produced

Chenery, Minhas, and Solow (1961).

Steady state growth rate for sectors (g) 0.075